SEC to mull hedge-fund, Sarbanes Oxley rules

WASHINGTON (MarketWatch) -- U.S. securities regulators are scheduled to consider a full slate of proposals at their meeting Wednesday including rules making it harder for investors to get into hedge funds and streamlining required reports about internal financial controls.

The Securities and Exchange Commission is gearing up for what Chairman Christopher Cox expects to be "one of the longest commission open meetings in quite a while," with Internet proxy voting and deregistration of foreign firms also on the Dec. 13 agenda.

In addition, the agency is scheduled to decide on whether to seek more comment about a controversial mutual fund governance rule that would require funds to have a majority of independent directors, plus independent chairmen.

Hedge funds

Cox and lawmakers from both parties have expressed concern about hedge funds, which are largely unregulated, and the SEC will decide on a proposal to raise the bar for investing in them from its current $1 million level. Regulators may also propose increasing the minimum annual income of investors from its current threshold of $200,000.

The incoming chiefs of both the Senate Banking Committee and the House Financial Services Committee said this week they want to collect more information about hedge funds, a more than $1 trillion industry. Sen. Christopher Dodd, D-Conn., who will lead the banking committee, said Thursday he's concerned about pension funds' exposure to risk through their investments in hedge funds, and vowed to examine them in the next Congress. Hedge funds are a "very, very important issue," Dodd told reporters.

Sarbanes-Oxley

Meanwhile, the SEC's five commissioners are also planning to propose changes to the audit rule of the Sarbanes-Oxley Act. Widely criticized by business for being costly and time-consuming, the law's Section 404 requires auditors to review corporations' financial controls in order to catch potential fraud.

Opposition to the rules, which were passed by Congress in the wake of financial scandals at companies like Enron and WorldCom, has been heating up recently. Last week, a high-profile panel of chief executives and academics co-chaired by a former economic adviser to President Bush said regulations including Sarbanes-Oxley are hurting U.S. competitiveness. The Public Company Accounting Oversight Board is also scheduled to propose changes to the audit rule at a Dec. 19 meeting.

Some foreign firms have found complying with U.S. regulations including Sarbanes-Oxley to be difficult, prompting concerns about capital flight from U.S. markets. On Wednesday, the SEC will also decide on proposing new rules that would make it easier for foreign companies to withdraw from the U.S. market.

That dovetails with a recommendation made by the executives' panel on Nov. 30. They argued foreign companies will be more willing to come to U.S. markets if they know they can leave. According to the SEC, commissioners will consider a recommendation to base deregistration thresholds solely on trading volume instead of on both volume and the percentage of U.S. holders.

New fund-rule analyses

Commissioners are also slated to revisit a mutual fund rule that requires 75% of a fund's board to have no ties to management. The rule, which would also require an independent chairman, was thrown out in April by a federal court after being challenged by the U.S. Chamber of Commerce, a business group.

At Wednesday's meeting, the SEC will consider whether to publish new economic analyses of the rule's costs and benefits. The rule was initially adopted after contentious debate and a split vote under former Chairman William Donaldson.

Also on the agenda are proposals about allowing the posting of proxy materials on the Internet and putting in place new rules for banks and brokers under the Gramm-Leach-Bliley Act. Commissioners will consider exceptions to the definition of "broker," and consider extending banks' exemptions from the broker definition.

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